CHAPTER 5 INCOME UNDER HEAD SALARY

Sec-15 - Basis of charge: i. Any salary due from employer in previous year, actually paid or not. ii. Any salary paid or allowed to him in previous year by or on behalf of employer, though not due to before becoming due and, iii. Any arrears in salary paid or allowed in previous year by or on behalf of employer if not taxed in earlier previous year. Salary is taxable on due or receipt basis which ever is earlier. Gross Salary Income

Basic

D.A.

Allowances

Perquisites

Profit in lieu of salary

Exempt

Taxable

Q.1 What is the basic condition to consider the income to be under head salary?
Relationship between payer and payee should be employer and employee Exception: i. Amount paid to Member of Parliament is charged u/s-56 not under head salary. ii. Partners salary not under head salary but u/s-28 exempt. Salary must be real and not fictitious.

Q.2. Define term salary , profit in lieu of salary ?

Sec-17(1): - SalaryIt includes: i. Wages. ii. Any annuity or pension. iii. Any gratuity. iv. Any fees, commission, perquisites, v. Profit in lieu of salary or wages. vi. Any advance salary. vii. Any payment received by employee in respect of leave not availed by him. viii. Transferred balance in R.P.F. ix. Portion of annual accretion to credit of employer participating in RPF (int.) Sec-17(3):-Profits in lieu of salary includes (i) the amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relating thereto; (ii) any payment due to or received by an assessee from an employer or a former employer or from a provident or other fund to the extent to which it does not consist of contributions by the assessee or interest on such contributions or any sum received under a Key-man insurance policy including the sum allocated by way of bonus on such policy. (iii) any amount due to or received, whether in lump sum or otherwise, by any assessee from any person

(A) Before his joining any employment with that person; or (B) After cessation of his employment with that person.

Q.3. What are the exemption available to salaried person ?

They are as under:Section 10 Sec-10 (5) Sec-10 (10) Sec-10 (10A) Sec-10 (10AA) Sec-10 (10B) Sec-10 (10C) Sec-10 (10CC) Sec-10 (11,12) Sec-10 (13) Sec-10 (13 A) Sec-10 (14) Particulars Leave Travel concession (LTC / LTA) Gratuity. Pension. Leave encashment Retrenchment Compensation Receipt on V.R.S Tax paid by the employer (for employee) Provident fund Super Annuation Fund (S.A.F.) H.R.A. Special Allowance.

Sec-10(5) Leave Travel Concession (LTC) 1. Leave travel concession received by or due to an employee & his family in concession with his proceedings on leave or on retirement or termination of service to any place in India is exempt, subject to condition laid down by CBDT(Rule-2B). 2. The amount of exemption be the amount actually incurred on the performance of such travel subject to condition:Journey by Rail Amount of A/c first Class rail fare Journey by Air Amount of fare of economy class Any other mode Amount of A/c first Class fare 3. W.e.f. 1/10/1998 the exemption shall not available to more than two surviving children of an individual. The exemption is available twice in a block of four calender years commencing from calendar year 1986. [existing block calendar year 1998 to 2002 to 2005]. 4. In case, such travel concession is not availed of by the individual during any such block of four calendar years. An amount in respect of the value of the travel concession, first availed of by individual during first calendar year of the immediately succeeding block of four calendar years shall be eligible for exemption.

Sec-10(10) Gratuity 1. Death-cum-retirement gratuity received by state & central government employees or of local authority is wholly exempted. 2. Non-Government employees Employees covered under Payment of Gratuity Act, 1972. 15/26 days (7days in case of seasonal establishment) * salary last drawn * No. of yrs. of service completed (ignore fractions) Rs.3,50,000 Actually Received Note here salary is defined as under a. In case where Payment of Gratuity; Salary = Basic + DA Other Employees 15/30 days (7days in case of seasonal establishment) * salary last drawn * No. of yrs. of service completed (ignore fractions) Rs.3,50,000 Actually Received

b. In case of other Salary is average salary of proceeding 10month , Salary= Basic + DA(If terms provided) + Commission on % basis. The gratuity received by the widow or children of deceased employees is totally exempt. Sec-10(10A) Pension Uncommuted pension is pension received monthly which is not covered under this section,i.e chargeable.. Commuted pension is certain % of total pension which is taken by the employee which is exempted. 1. In case of government employees wholly exempt. 2. Non-government employees the exemption is as under:a. If gratuity is received then 1/3 rd of total pension is exempt. b. If gratuity is not received then 1/2 of total pension is exempt. Sec-10(10AA): - Leave Encashment Leave encashment means to get salary for the leaves which were granted but not availed. In case of government employees- 100% exempt In case of non-government employees least of the following is exempt:i. Cash equivalent of leave salary in respect of period of earned leave to credit of employee at the time of his retirement (1 month for every year) on average salary. i.e. Unavailed Leave * Average Salary Unavailed Leave = [30 days * No. of yrs. of service] Availed leave. ii. 10 months average salary. iii. 300000/- W.e.f. 1st Apr.98 iv. Actually received Here,Salary = Basic + D.A. (if terms provided) + % basis commission. Sec-10(10B): - Retrenchment Compensation a. Amount calculated as per Sec-25F of Industrial Dispute Act, 1947. b. Rs. 500000/c. Amount actually received, Which ever is less. Sec-10(10C) Compensation received at the time of VRS. Guideline as per rule 2BA i. Maximum amount of exemption Rs. 500000 guideline as per Rule 2BA, the scheme must be in accordance with the following requirements. Employee completed 10 years service;or Age is more than 40 years Exception: - public sector companys employee ii. Applies to all employees workers and executives. iii. Scheme has been drawn for over all reduction. iv. Vacancy caused by VRS is not filled up. v. Amount receivable on account of VRS does not exceed amount equivalent to three months salary for each completed year of service multiplied by balance months of service left before date of his retirement. 3 months salary X No. of Yrs. Of service X Balance months till date of retirement. vi. Relief u/s-89, will be admissible. vii. Approved of scheme is not required. Sec-10(13A) & Rule 2A - House Rent Allowances: Exemption criteria are least of the following:Resident in Mumbai, Calcutta, Delhi, Chennai 50 % of Salary HRA Received. Rent paid 10 % of Salary Which ever is less Resident in other cities 40 % of Salary HRA Received. Rent paid 10 % of Salary Which ever is less

a. b.

1 2 3

Salary= Basic + D.A. (term provided) + Commission on % basis

Sec-10(14) Special Allowances: Exemption on actual expenditure basis: Traveling allowance. Conveyance allowance Daily allowance Helper allowance Research allowance Uniform allowance Expenditure or Allowance received Whichever is less is exempted. Exemption on fixed amount basis: Allowance for transport employees. 70 % of allowance OR which ever is less. Rs. 6000/- p.m. Children education allowance: - Rs. 100 p.m., per child for maximum 2 children. Hosted allowance: - Rs. 300 p.m., per child for maximum 2 children Transport allowance: - (office residence office) Exemption: - Rs. 800 p.m. in normal case. Rs. 1600 p.m. for blind or handicapped assessee. 1. Fixed amount u/s10(14) or 2. Allowance received Whichever is less is exempted.

Sec-10(11)(12): Particulars Statutory P.F. Employers Contribution Employees contribution Interest created Lumpsum receipt 100 % exempt for employee Deduction u/s-80C 100 % exempt 100 % exempt

Recognized P.F. Exempt up to 12 % of salary Deduction u/s80C Exempt up to 9.5 % 100 % exempt

Un-recognized P.F. 100% exempt Not Applicable u/s-88 100 % exempt. i. Employees contribution is exempted. ii. Interest on employees contribution under head other sources. iii. Employers contribution and interest taxable under head salary.

Public P.F. ---Deduction u/s80C 100 % exempt 100 % exempt.

Here, Salary = Basic + D.A. (if terms provided) + commission on % basis.

Q.4 Define Perquisites? Sec-17(2) - Perquisites: Perquisites include the following items; Value of rent-free accommodation. Value of concessional rent accommodation. Value of any benefit or amenity granted in following cases a. Director. b. Employee being a person who has substantial interest in company. c. Employee t whom provision (i) & (ii) do not apply and whose income under head salary including the value of benefit or amenities (and after deduction u/s16) exceeding Rs. 50000 Sum paid by employer in respect of any obligation which but for such payment would have been payable by assessee. Any sum payable by employer through a fund other than RPF or approved super Annuation funds or deposit link insurance fund. Value of any other fringe benefits or amenity as may be prescribed. Sub-clause (vi) shall be amended so as to provide that the value of any other fringe benefit or amenity which may be prescribed, shall exclude those fringe benefits which are chargeable to tax under Chapter XII-H.

Q.5 Discuss the taxable perks and tax-free perks ?

Taxability of perquisites 1) Taxable in hands of all employees a) Rent free furnished/unfurnished accommodation b) Concessional rent accommodation c) Discharging of any monetary obligation of employees d) Any other fringe benefits: Such as , interest free concessional loan, use of movable assets, transfer any movable asset for concessional rate. 2) Taxable in the hands of specified employees as define a) Domestic servants

b) c)

Free or concessional use of gas, electricity & water Free or concessional educational facilities

1.

Tax-free Perquisite Medical facility or reimbursement:Facility provided in employers hospital. Reimbursement of treatment in private clinic up to Rs.15000 Refreshments: Free meals provided during office hours in business premises is exempt up to Rs.50 per meal Loan to employees up to Rs.20000 and in case exceeds then for medical treatment in respect of specified diseases mention in Rule-3A. Rent free house /conveyance facility to judge of supreme/high court. Education facility for children of employee up to Rs.1000p.m. Use of laptop or computers.

2. 3. 4. 5. 6.

Premium paid by employer on an accident policy. Tax paid by employer on non-monetary benefit. Perquisites

Q.4 State the taxable perks and how they are to be valued ?
Rent free Accommodation [Rule 3(1)]

Rent free unfurnished accommodation Accommodation includes, flat, farm-house, hotel motel, or such other structure. Valuation A) In case of Central or state Govt. employees Value = License fees as determine by Govt. rules. In case of Non-Govt. employees As under City- Population Slabs 0 to 10 lakh 10 lakh to 25 lakhs Exceeding 25 lakhs Accommodation owned by Employer 7.5% of Salary 10 % of Salary 15 % of Salary Accommodation not owned by Employer 1. 15% of salary or 2. Rent paid Whichever is less. 1. 15% of salary or 2. Rent paid Whichever is less. 3. 15% of salary or 4. Rent paid Whichever is less.

Here, Salary = Basis + D.A.(if terms provided) + Bonus + commission + fees + all taxable monetary allowances / benefits

Rent-free furnished accommodation Valuation: Valuation of unfurnished accommodation [As per Rule 3(1)] Add: 10 % of original cost of furniture p.a. OR Actual higher charges of the furniture Rent free furnished accommodation Accommodation Provided in Hotel It is taxable if; i. Accommodation provided for not less than 15 days. ii. Employee is not transferred from one place to another.

xxxxx xxxxx xxxxx

Valuation :24 % of salary paid or payable in previous year Actual charges of the hotel. which ever is less Accommodation provided at concessional rent Valuation: In such case the valuation is as under, Valuation of rent-free Furnished or unfurnished or hotel Less: Rent paid by employee Concessional rent (taxable)

OR

xxxxx xxxxx xxxxx

Valuation in respect of Gas, Electricity, Water supply (free of cost) [Rule 3(4)] Valuation: 1. Purchased by employer from outside agency. Valuation = sum equal to the amount paid 2. Supplied out of own sources Valuation = manufacturing cost per unit. 3. Where any amount is charged to employee for the above is deducted from the valuation. Valuation in respect of free education [Rule 3(5)] Payment of school fees of employees children is taxable Re-imbursement of school fees of employees children is taxable as perquisite. Educational facilities in employers institution. Exempt up to cost of such education per child is Rs. 1000 p.m. Valuation in respect of Free Domestic Servant [Rule 3(3)] Servant includes; Gardner, sweeper, watchman Valuation: - Actual salary paid. Actual salary paid by employer amount paid by employee. Special point: If employer provides a rent-free house, expenditure incurred by employer on maintenance of garden or ground is not taxable separately. (circular 122) Domestic servant all given to employee is taxable. If servant is engaged by employee and the salary paid by employer is taxable in hands of all employees. But if servant is engaged by employer then is taxable in hands of specified employee.

Valuation in Respect of Interest Free Loan or Concessional Rate of Interest [Rule 3(8)] It is not charged to tax if; i. Loan is made available for medical treatment of diseased specified in the Rule 3A ii. Amount is petty. Not exceeding Rs. 20000 Valuation: - ( SBI sRate of Interest Employers Rate of Interest) *Loan amount It is at the rate charged by SBI as on Ist day of relevant p.y. in respect of loans for the same purpose. Interest is calculated on maximum o/s monthly balance as reduced by interest if any paid by the employee.

Valuation in Respect of Use of Movable assets Valuation: - 10 % p.a. of actual cost. OR Amount of rent paid or payable.

Valuation in Respect of moveable asset sold by employer to employee at nominal price Valuation: Cost of asset Less: Depreciation up to date of sale W.D.V. xxxxx xxxxx xxxxx

If W.D.V. is more the amount charged to employee, is taxable as perquisite. W.D.V. sale consideration = perquisite Rate of depreciation Electronic items / computer 50 % WDV Motor Car 20 % WDV Any Other 10 % SLM Valuation of Medical Facilities The following are not treated as taxable perquisites; i. Medical facility in employers hospital. ii. Medical facility in Govt. hospital re-imbursement iii. Treatment of prescribed diseases in approved hospital. iv. Approved by CCIT v. Medical facility is private clinic. Amount not exceeding Rs. 15000 in year re imbursement by employer. vi. Medical facility outside India. Perquisite not charged to tax Medical treatment of employee or any family member outside India Cost on travel of one person accompanying the patient outside India Cost of stay abroad of one person accompanying the patient outside India. Conditions to be satisfied Amount permitted by RBI Employees Gross Total Income is less than 2 lacks before adding this perquisite Amount permitted by RBI

Valuation of Motor Car When Car is owned by Employee Exp met by employee Not a perquisites

Exp met or reimburse by employer Wholly Official Purpose:- exempt Wholly Private Purpose:- [ Actual exp Borne by employee] Partly :0 to 1.6ltr CC 1800 p.m Exceeding 1.6 ltr 2400 p.m. Chauffeur Additional 900 p.m

When Car is owned or hired by employer Exp met by employee Not a perquisites Exp met or reimburse by employer Wholly Official Purpose:- exempt Wholly Private Purpose:- [ Actual exp Borne by employee] Partly :0 to 1.6ltr CC 1800 p.m Exceeding 1.6 ltr 2400 p.m. Chauffeur Additional 900 p.m Expense are met by employee Exp met by employee Not a perquisites Wholly Official Purpose:- exempt Wholly Private Purpose:- [ 10% of Cost + Drivers Salary] Partly :0 to 1.6ltr CC 600 p.m Exceeding 1.6 ltr 900 p.m. Chauffeur Additional 900 p.m When any automotive other than car is owned by employee and expense are reimburse by the employer Wholly Official Purpose:- exempt Partly :[Actual Cost - 600p.m or expense allowed by employer (higher)] Valuation of Refreshment Food and non-alcoholic beverages exempt up to 50 per meal Valuation of free transport facility Cost to employer recovered from employee Valuation of travelling ,touring and accommodation Cost to employer recovered from employee Valuation of gift voucher or token Exempt up to 5000p.a Valuation of Credit Card facility Actual expense paid by employee for official purpose Valuation of Club Facility Actual expenditure- official exp- recovered from employee

Q.6 What are the statutory deduction available to salaried person from his gross salary?
(i) Professional Tax : [Sec-16(iii)] - In case paid by employee then directly allowed as deduction from gross salary. - In case paid by the employer then firstly added in the gross salary as perks and then allowed as deduction (ii) Entertainment allowance : [Sec-16(ii)] It is allowable only in case of Government employee. To the extent of least of the following: Rs.5000; or 1/5th of salary; or Actual recd. (Salary for this purpose means only basic salary and excludes all allowances, benefits and perquisites. Even DA is to be excluded)

State the meaning of salary under different circumstances?

SEE THIS FROM PG.183 -Manoharan Section-wise summary Section 15 16(i) 16(ii) 16(iii) 17 Particulars Chargeability Standard deduction Entertainment allowance Profession tax. Definition- Salary, Perquisite, Profit in lieu of salary

CHAPTER 6 INCOME FROM HOUSE PROPERTY

Income from House Property (Sec-22 to Sec-27)

Q.1 State the income chargeable under head House Property ?

Sec-22 Basis of charges: Rental income is taxable under this head if the following conditions are satisfied. i. Property is building or land appurtenant there to (structure above land) ii. Assessee is owner. iii. Property should not been used by owner for business purpose. Income from sub-letting is taxable u/s-56

Q.2 Explain the Provision of Deemed Owner?

Deemed Owner: As per Sec-27, the following persons are treated as deemed owner. i. Individual :-An individual who transfer house property other wise than for adequate consideration to his or her spouse or to his minor child as per the provision of Sec-54, then he is treated as deemed owner. ii. iii. iv. Co-operative Society:-Member of co-operative society, company or AOP to whom a building or a part thereof is allotted or leased, is treated as deemed owner. Impartial Estate:- Holder of impartial estate is deemed owner. Part Performance:-Any person allowed to retain possession of any property in part performance of a contract is treated as deemed owner.

Q.3 What is the chargeability if the owner is having the office of business or profession in that house property ?
If the property is occupied by owner for business or profession then the rent for taxation purpose is considered as NIL. This is only in case of proprietary concern. In this case, a notional rent of property is not allowable as deduction while computing business income.

Q.4 What is the chargeability in case of rent of quarters to company?

In case of CIT Vs. Delhi Cloth & General Mills Ltd., it was stated that, the letting out activity is sub-servant and incidental to the main business, then it is not taxable u/s-22. the residential quarters let-out to the employees then such activity is incidental to main business and is not charged u/s-22.

Q.5 State the chargeability in case of foreign house property, disputed ownership & if property held for business purpose?
Special Cases: i. House Property in a foreign country: - A resident assessee is taxable u/s-22, in respect of property situated in foreign country. The tax incidence will be computed as if the property situated in India. ii. Disputed ownership: - If there a dispute ownership regarding the title, the assessment can not be held up till the decision. It is income of the person who enjoys possession. iii. Property held as stock-in trade is not charged u/s-22

Q.6 State chargeability in case a furnished property is rented ?

Treatment of composite rent Case 1 When the rent includes, rent of building and charges for different services, then if it is separable then the building rent taxable u/s-22 and other rent u/s-56 or u/s-28 Case 2 Where the rent is of letting out building or other assets then, a. If separable then, building rent u/s-22, other rent u/s-28 or u/s-56. b. It non-separable then, u/s-28 or u/s-56 (total rent received)

Q.7 What is the treatment in case there are co-owners?

When House Property is owned by co-owner (Sec-26) If the shares of co-owner are definite, then such share is included in the total income of that particular person. Co-owners are not taxable as AOP.

Q.8 State the exemption available under section 10?

Exempted Income Sec-10(1)- Income from Farm-House. Sec-10(19A)- Annual value of any palace of an ex-rural. Sec-10(20)- Property income of local authority. Sec-10(21)- Income of an approved Scientific Research Association. Sec-10(23)- Property income of Games Association Sec-10(23C)- Property income of an educational institution & hospital. Sec-10(24)- Property income of trade-union Sec-10(26A)- Property income in case of person residential of Ladakh. Sec-10(11)- Property income of property held for charitable purpose. Sec-10(13A)- Property income of political party. Sec-25(2)- Self occupied property.

Format
Gross Annual Value Less: - Municipal Tax paid by Owner (on payment basis only) Net Annual Value Less: - Deductions u/s-24 30% on N.V.A u/s-24(a) xxxxx xxxxx xxxxx xxxxx

1/5th of pre construction interest (Preceding the year of completion) Interest u/s-24(b) Income from House property

xxxxx

xxxxx xxxxx

Q.9 How to determine Gross Annual Value (GAV)?

Steps for determination of G.A.V.: a. Municipal valuation or fair market value. which ever is high, subject to standard rent. b. If, i. Actual rent received / receivable is more than option (a) then select option (b)(i). ii. iii. iv. vacancy] (Actual rent received / receivable- unrealized rent) is less (due any reason other than vacancy) than option (a) then select option (b)-which ever is high (Actual rent received / receivable-unrealized rent-vacancy) is less (due to reason of vacancy) than option the select option (iii)-which ever is less. (AR-UR-V) is less(due to partly reason of vacancy) then [option (a)-

It is explained in the summarize chart below

Computation of Gross Annual Value

Step-1 Compare Fair Rental Value Municipal Valuation Whichever is high Let say (A)

Step-2 Compare (A) Standard rent Whichever is low Let say Expected Rent (B)

Step-3 Compare (B) Actual Received/Receivable Whichever is high

In case, in the last step if actual rent is less then GAV is determine as under B > Actual Received/Receivable then GAV depends upon reason:

If due to vacancy then

(B) Actual Received/Receivabl e Whichever is low

If due to partly vacancy and partly any other then

If due to any reason other then vacancy then

[(B) vacancy]

1. (B) 2. Actual Received/Receivable Whichever is high

Q.10 State the provision if the property is self-occupied?

Sec-23(2)(a)- If House Property is self occupied OR Sec-23(2)(b)- House property can not be self occupied by reason of employment or business out of the city then GAV is NIL In case the house property is used for business purpose then the GAV is considered NIL.

Q.11 State the provision in case of Part of the House is Let out and Let-out for Part of the Year ?
Sec-23(3)(a): - If part of the house is let out then proportionate rent should be calculated. Sec-23(3)(b): - Any other benefit derived to be considered. If House property is let out for part of the year then no proportionate rent is allowed.

Q.12 State the chargeability in case if there are more then one selfoccupied property?
Sec-23(4)(a): - If the assessee is the owner of more than one house property then, it is at the option of assessee to select one house property as self occupied and other deemed to be let out.

Q.13 What are the deduction from NAV ?

Sec-24(a) - Standard Deduction: - 30% of net annual value. Sec-24(b) Interest on Housing Loan

Q.14 What are the conditions in case of interest on housing loan?

Conditions:1. Interest on borrowed capital for Construction, repair, renewal, re-construction. 2. Interest certificate is required to be furnished along with the return to avail the deduction. 3. The construction must be completed within 3 years from end of financial year in which the capital is borrowed. 4. If fresh loan has been raised for for repayment of old loan then interest on such loan is also deductible.

Q.15 What are the limit of deduction u/s 24(b)?

1. 2. i. Apr. 99. ii. For self occupied, the interest limit is Rs. 150000, if the amount borrowed after 1st Apr. 99 and the acquisition or construction completed within 3 years.
Before

There is no limit in case of Let-out or Deemed to be let-out house property. The limit for self-occupied is determine on basis of date of borrowing which is as under:For self occupied, the interest limit is Rs. 30000 if, the borrowed amount is before 1st

Max. Rs.30000 OR

Amount borrowed 1.4.99 Max. Rs. 150000

After

Q.16 How the interest is calculated?

1. The interest consists of two parts. They are as under Interest = Current Year + Pre-Construction period 2. Pre-construction period means the period when the property is not owned by the assessee as it is under construction. But though property is not owned, the interest is charged from the date of borrowing. So the benefit of the interest of this pre-construction period is available in after the assessee is owner of the property. 3. Calculation of Pre-construction Period & deduction of interest available Pre construction period = Date of borrowing to. a. 31st march preceding the date of completion or acquisition, which ever is earlier OR b. Date of repayment. The date which ever is earlier. Calculate the total pre construction interest with monthly or daily basis: From the date of borrowing to the date [(a) or (b)] which is earlier. Pre construction period Interest deduction Pre construction period interest = Total pre-construction Interest 5 Years. If the house property is sold out only interest is allowed as a deduction u/s-24(b). Sec-25: - Interest on loan payable outside India is disallowed if tax on it is not deducted.

Q.17 State the treatment of realization of unrealized rent of earlier year ?

Sec-25A & AA: - Realization of unrealized rent. i. Sec-25A: - unrealized rent allowed as deduction in A.Y. 2001-02 is recovered subsequently then it is charged to tax without making any deductions. It is not necessary that assessee is the owner of house property in that previous year. ii. Sec-25AA: - unrealized rent of A.Y. 2001-02 collected subsequently. The amount so realized to the extent it has not been included in the annual value earlier shall be deemed to be the income under house property.

Q.18 What is the treatment of Rent in arrears ?

Sec-25B- Rent in Arrears: i. Amount received by way of arrears of rent, not charged to tax in previous year. ii. Standard deduction @30% shall be considered while calculating income by way of arrears. iii. It is taxable even if assessee is not the owner.

Q.19 Discuss the provision in case of loss from House property? Section-wise summary
Section 22 23 24 25A & 25AA 25B 26 27 70 & 71 71B Particulars Chargeability Determine GAV Deductions Unrealized rent Arrears of rent CO-owners Deemed ownership

CHAPTER 7 PROFITS & GAINS FROM BUSINESS & PROFESSION

Q.1 State the income which is chargeable under head Business Profession?
Sec- 28 Basis of charge The following incomes are chargeable to tax under this head Profit & Gains of any business or profession. Income derived by a trade, professional or similar association from specific services. Value of any benefit or perquisites convertible into money or not. Export incentives available to exporter. Any interest, salary, bonus, commission or remuneration received by partner from firm. Any sum received for not carrying out any activity in relation to any business or not to share any know-how, patents, copyrights, trademark, etc. Any sum received under a key-man insurance policy including bonus. Income from speculative transactions. The following income is not chargeable under this head.(Exception) Rent of house property: - even if the recipient is engaged in the business of letting property on rent. Dividend on shares: - even if derived from shares held in stock. Winnings from lottery, races, etc.: - even if derived as a regular business activity.

Q.2 State the which method of accounting are accepted under Income-Tax act,1961? Sec-145 Method of Accounting
There are two main methods of accounting: - Mercantile System, Cash System. As per Sec-145 Income under this head or income from other source shall be computed only in accordance with the accounting system regularly employed by an assessee. The central Govt. has empowered to prescribe by notification in gazette that accounting standard will have to follow in computing such income. Govt. should consult to ICAI while laying down such methods. If the books are not maintained properly then the Assessing officer can make assessment to the best of his judgement(Sec-144)

Q.3 How the valuation of stock is done? Sec-145A: - Valuation of stock

When CENVAT credit is available: - the issue relating to whether the value of closing stock of input, finished goods and w/p must necessarily include the element in which CENVAT available, has been the matter of considerable litigation.

 By virtue of Sec-145A, valuation of purchase or sale of goods and inventory for purpose of determining income under business head shall be; i. In accordance with the method of accounting regularly employed by the assessee &,Further adjusted to include, the amount of any tax, duty, fees actually paid or incurred by assessee to bring the goods to the place of its location and conditions as on date of valuation

Deduction / Allowances under this head: -

Q.4 What are the thumb-rule to be remember in case of allowable deduction?

Onus of proof (burden): - It is responsibility of assessee to prove that the deduction is allowable. The expenditure should relate to previous year. Business should be carried on during previous year. Expenditure should have been incurred in connection with assessors business. The benefit of expenditure may extent to somebody else. The benefit of expenditure may extend beyond relevant previous year. Expenditure relating to illegal business is allowed as deduction if the profit of illegal business is taxed. No allowance in respect of anticipated loss (eg. R.D.D.) No deduction is respect of depreciation on investment. There are certain expenditure which are allowed & certain disallowed Allowances: - Sec-30 to Sec-37 Disallowances: -Sec-40(a), 40(b), 40(ba), 40A(2),40A(7), Sec-40A(9), Sec-43B

Q.5 What are the types of business categories for income tax purpose ?
There are two types Speculative and non-speculative. Non-Speculative means any trading & and manufacturing activity or rendering service Sec-43(5) Speculative Transaction:- It means a transaction in which a contract for purchase on sales of any commodity, includes stock and shares, is periodically or ultimately settled otherwise than by actual delivery or transfer of commodity or scraps.

Q.6 What are exceptions to Speculative transaction u/s43(5)?

i. Contract in respect of raw material etc. entered into by a person in course of his manufacturing or trading business to guard against loss through future price fluctuation. ii. Contract in respect of stocks and shares entered by dealer on investor to guard against loss in his holding of stock and share through price fluctuation. iii. Contract entered into by member of a forward market or stock exchange in the course of any transaction in nature of jobbing or arbitrage to guard against loss arises in the business. Allowable Deductions: -

Q.7 State the provisions relating to deduction of expense for building used for business or professional purpose?
Sec-30: - Rents, Rates, Taxes, and Repairs & Insurance for Building. Rent of premises occupied by assessee as tenant.

 Amount of current repairs: - if assessee occupies premises otherwise than as tenant. Current repairs should be of revenue nature and should not be accumulated repairs. Land revenue, local rates or municipal taxes: - Subject to [sec-43B] Premium in respect of insurance. Sec-38:-Building, etc., partly used for business, etc., or not exclusively so used. (1) Where a part of any premises is used as dwelling house by the assessee, (a) the deduction under section 30, in the case of rent, shall be such amount as the Assessing Officer may determine having regard to the proportionate annual value of the part used for the purpose of the business to the user of such building, machinery, plant or furniture for the purposes of the business or profession.

Q.8. What are the deduction available in case of machinery, plant & furniture?
Sec-31: - Repairs & Insurance of Machinery, Plant & furniture. The expenditure on current repairs and insurance is allowed as deduction. Current repairs means repairs which are attended when they are expedious to do, the need for them arises from assessee point of view and which are not allowed to be accumulated.

Q.9 What are the conditions for claiming depreciation?

Sec-32(1) - Depreciation Conditions Ownership:- Asset should be owned by assessee- registered ownership is not required. Asset must be used for business purpose or in profession residential quarters: - when the residential quarter are occupied by employees of business, the property is considered as occupied by owner for business purpose. Use of asset in previous year if the asset is acquired in previous year and put to use for more than 180 days during previous year then 100% depreciation can be claimed. If it is less than 180 days then 50 % depreciation can be claimed. Depreciation is available on tangible and intangible assets.

Q.10 State how the assets are classified for income-tax purpose?
The asset classified on basis of their rate of depreciation. These are called blocks of asset. Sec- 2(11): - Block of Assets It means group of assets, falling within Tangible asset: - Building, machinery, plant and furniture. Intangible asset: - know-how, patents, copyrights, trade marks, license, franchisee etc. There are total 18 blocks, out of which up to 11 are of tangible assets and 7 are of intangible assets

Q.11 How is depreciation calculated ?

Sec-43(6) WDV method Calculation by WDV of block of asset Opening WDV Add: Asset acquired during P.Y. XXXX XXXX

Less: Sale during P.Y. WDV before Depreciation Depreciation on it

XXX XXXX XX

Note - If the amount of asset acquired is greater than closing WDV before depreciation then the depreciation is calculated on closing WDV. Here the sale proceed are greater then (opening + assets acquired), then the excess chargeable as short term capital gain. - If asset is acquired in previous year and put to use for less than 180 days in the previous year then assess can claim only 50% depreciation. - If asset is acquired earlier then the previous year and put to use in previous year for less than 180 days then also assess can avail 100% depreciation.

Q.12 What is the actual cost to considered in case of asset acquired ?

Sec-43(1) defines Actual Cost as under It means the actual cost of asset to the assessee reduced by that portion of cost met directly or indirectly by any other person on authority.

For removal of doubt following explanations are their:Expl. To sec43(1) 1 2 Situation Actual cost

Asset used for scientific research purpose and then put to use for business purpose. Asset acquired by inheritance or gift.

NIL Actual cost of Previous Owner minus notional depreciation till the date of acquisition. As determined by Assessing officer with approval of JCIT Least of two - Cost depreciation or - Re-acquisition WDV to Seller at time of sale Actual cost minus depreciation till the date of put to use in business Cost plus Interest on loan from date of borrowings to date when asset is put to use. Cost minus portion of excise which is claimed as CENVAT

3 4

Transfer of asset for reduction of tax liability Asset transferred and re-acquired

4A 5

Sale-Lease-Back Building which was used for non-business purpose earlier is brought in to business. Asset acquired by borrowings

If cost include excise duty which is claimed for CENVAT credit.

10

When the cost of asset partly or fully met by government i.e. subsidy.

Cost minus subsidy

Q.13 What are the condition required for claiming additional depreciation?
Additional Depreciation [Sec-32(1) (iia)] Condition 1. Any undertaking, if the taxpayer is engaged in the business of manufacturing or production of any article or things. 2. It is available on acquisition and installation of new plant and machinery. 3. It is available @ 20% if put to use for more than 180 days and 10% if less than 180 days.

Q.14 State the asset on which the additional depreciation cannot be claimed?
Deduction is not allowed in the following cases; 1. Ship and Aircraft. 2. Any machine or plant before installation was used by any other person either within or outside India. 3. Plant installed in any office premises or residential accommodation including guest house. 4. Any office appliances or road transport vehicles or any machinery of plant, the whole of the actual cost which is allowed for the deduction in any previous year.

Q.15 What is Balancing charge and Terminal depreciation in case of power generating units?
Balancing Charge & Terminal Depreciation in case of Power Generating Units 1. Balancing charge means if whole of the block is sold and the WDV becomes negative then the excess amount to the extent (Cost Accumulated depreciation) charge to tax as notional income U/S 41(2). 2. Terminal depreciation means if whole of the block is sold and still WDV is positive then it is allowed depreciation in the relevant P.Y.

Q.16 What is Unabsorbed depreciation and state its provision?

Unabsorbed depreciation means when the profit is inadequate to absorb the depreciation of current year , 100% then whatever balance not able to debit to P & L is unabsorbed. Sec-32(2) Unabsorbed Depreciation Depreciation allowance of previous year is first: - deducted from income from business. If it is not fully deductible due to inadequate profit, it is deductible from income charged under other heads of income for same assessment year. In subsequent year unabsorbed depreciation can be set off against any income under any head. Continuity of business is not necessary. Priority of set off in subsequent year. a. Current Depreciation. b. Brought forward business loss. c. Unabsorbed depreciation

Q.17 State the special deduction available for tea or coffee growing business ?
Sec-33AB Tea and coffee Development A/c Condition :Eligibility:-An assessee is engaged in the business of growing & manufacturing tea or coffee or rubber in India. 1. Deposit:-Assessee must deposit amount in NABARD-National Bank of Agriculture & Rural Development or Tea Deposit A/c in accordance with scheme frame by Central govt.

2. Time limit to deposit:-The amount must be deposited within 6 month from the end of P.Y. or before due date of furnishing return, whichever is earlier. 3. Amount of deduction Amount deposited or 40% of profit before deduction U/s33AB and b/f losses.

4. Maintenance of Books of Accounts & Audit:- The accounts must be audited by a C.A. and shall submit audit report in Form 3AC. 5. Utilization of amount:-The amount deposited must utilized as per specified scheme. But it shall not be utilized to purchase plant, machinery to be installed in office premises or residential accommodation or guesthouse. It should not be utilize for purchase of any office appliance other than computer, and plant or machinery utilized for producing low priority items specified in the eleventh schedule. 6. Deemed income:-The deduction shall be withdrawn if the asset acquired in accordance with the scheme is sold or transfers within 8 years from the end of p.y. in which it is acquired. However it is not applicable is transfer to govt., local authority or Govt. Company. 7. Closure of business:-Apart from the purpose specified in the scheme the amount may be allowed to withdrawn in the following cases; Closure of business Death of taxpayer Partition of HUF Dissolution of firm Liquidation of company Incase of closure and dissolution of firm the amount withdrawn is treated as taxable profit.

Q.18 Discuss the special deduction available u/s 33ABA?

Sec-33ABA Site Restoration Fund Conditions:1. Eligibility:- Taxpayer is engaged in the business prospecting for or extraction and production of petroleum or natural gas , in India. 2. Agreement:-The central govt. has entered in to agreement with the taxpayer for such business. 3. Deposit:-Must deposit amount in special a/c in SBI maintain by assessee in accordance with and for the purpose specified in the scheme approved by govt. of India or deposit amount as per scheme frame by Ministry of Petroleum & Natural gas. 4. Time limit of Deposit:-Amount must be deposit before end of P.Y.

5. Maint. Of books of accounts and audit:-The accounts must audited by C.A. and shall submit the audit report in form 3AD along with the return. 6. or 20 % of profit 7. Utilization of amount:- The amount deposited must utilized as per specified scheme. But it shall not be utilized to purchased plant, machinery to be installed in office premises or residential accommodation or guest house. It should not be utilized for purchase of any office appliance other than computer, and plant or machinery utilized for producing low priority items specified in the eleventh schedule. 8. Deemed income:-The deduction shall be withdrawn if the asset acquired in accordance with the scheme is sold or transfers within 8 years from the end of p.y. in which it is acquired. However it is not applicable is transfer to govt., local authority or Govt. Company. Amount of deduction Sum deposited

Q.19 What is the deduction available for expenditure done of scientific research for business purpose ?
Sec-35: - Expenditure on Scientific Research i. Scientific research has been defined as any activity for extension of knowledge in the field of natural or applied science including animal husbandry and fishery. ii. Assessee carries on scientific research and incurs expenditure during p.y. if research relates to business. Their can be two types of expenditure Sec-35(1) (i) Revenue expenditure Salary & perquisites to research personal, material input during the period of 3 years immediately preceding the commencement of business is regarded having being incurred in p.y. in which the business is commenced. 100% allowed.

Sec-35(2) Capital expenditure : where assessee incurs any expenditure of capital nature other than land on scientific research related to business then 100% deduction is allowed. Capital expenditure during the period of 3 years immediately preceding the commencement of business is regarded having being incurred in p.y. in which the business is commenced. Deduction by way of depreciation is not admissible in respect of an asset used in scientific research. If the asset is sold without having being used for any other purpose sale value is chargeable to tax as business income of p.y. u/s 41(3). If the asset is ceased to be used for scientific research and business the nil value be added to the relevant block of asset for purpose of depreciation.

Q.20 What is the deduction available in case of donation/payment to university, college, institution or National Lab. for scientific research relating to or unrelated to business? Contribution to outsider- weighted deduction of 125%
Contribution to other approved scientific research association, university, college or institution related or unrelated to the business of assessee. [Sec-35(1)(ii)] Contribution to other approved scientific research association, university, college or institution to be used for research in social science or statistical research.[Sec-35(1)(iii)] Contribution to National Laboratory, university or IIT. [Sec-35(2AA)]

National Laboratory means a scientific laboratory functioning at the national level under the aegis of the Indian Council of Agricultural Research, the Indian Council of Medical Research, the Council of Scientific and Industrial Research, the Defense Research and Development Organization, the Department of Electronics, the Department of Bio-Technology or the Department of Atomic Energy and which is approved as a National Laboratory by the prescribed. w.e.f. A.Y. 2009-10 :-Any person making payment to Indian company with main object of scientific research & development ,having approved by prescribed authority, are eligible for deduction of 125%

Q.21 What is the benefit to companies in case of in-house research? Sec-35(2AB): A company engaged in the any business except manufacturing of article or things specified in schedule XI ,incurs expenditure on in-house research. Then weighted deduction of 150% is allowed. It is not available for cost of land & building. This deduction is available till 31.3.2012

Q.22 What is Unabsorbed capital expenditure for scientific research and state its provision ?
Unabsorbed capital expenditure for scientific research means when the profit is inadequate to absorb the capital expenditure of current year , 100% ,then whatever balance not able to debit to P & L is unabsorbed. In case of inadequacy or absence of profit of business, deduction on account of capital expenditure cannot allowed fully or partly. The deficiency so arising is to to be carried forward for set off, as of unabsorbed depreciation.

Q.23 State how the Telecom License fee is treated under income tax 1961? Sec-35ABB:- Amortization of Telecom License Fee
It provides that any capital expenditure incurred and actually paid by assessee on acquisition of any rights to operate telecommunication services by obtaining license will be allowed as deduction in equal installment over the period starting from the year in which such payment has been made and ending in the year in which license comes to an end. If expenditure incurred before the commencement of business the assessee will get deduction beginning from the year in which such business commenced.

Q.24 State the chargeability in case of transfer of license either partly or fully ? [Sec-35ABB] Fully Transferred
1. Where the license is transferred and proceeds<expenditure remaining unallowed. Then [Expenditure unallowed sale proceeds] allowed as deduction in P.Y. 2. Where the license is transferred and proceeds>expenditure remaining unallowed. Then [sale proceeds - Expenditure unallowed] is taxable as business profit u/s 41(3).

Partly Transferred
Where a part of license is transferred in P.Y. the deduction to be allowed for expenditure remaining to be allowed and calculated as under a) Expenditure unallowed proceeds b) Dividing by number relevant P.Y. which have not expired at beginning of P.Y. during which license is transfer, if payment made in installment then deduction is to be allowed to the extent of installment paid by amortizing it for license period.

Q.25 State the provision relating to expenditure on eligible project ? Sec-35AC:- Expenditure on Eligible project
1. Deduction allowed in respect of expenditure incurred for an eligible project or scheme for promoting social & economic welfare or upliftment of public as may be specified by central govt. on recommendation of National committee. 2. Certificate from C.A. must be obtained in case of exp. on eligible project in form 58B. Approval of National Committee. The association or institution or eligible project scheme can avail 100% deduction. The association or institution or eligible project scheme should furnish a progress report within prescribe form before the end of financial year to National Committee. If fail o furnish then approval shall be withdrawn. Opportunity of hearing will be given before withdrawing. A copy of withdrawing the approval shall be forwarded to AO having jurisdiction over association or institution or eligible project scheme(company).

Q.25A State the provision relating to expenditure on specified business? Sec-35AD

1. Eligibility :-Any Person doing specified business except cross country pipeline for petroleum and natural gas only Indian company , can claim the deduction. 2. Specified business :- includes cold storage, warehouse for agricultural produce and cross country pipeline for petroleum and natural gas 3. For purpose of petroleum and natural gas ,approval of the board and notified by central government. 4. Business commencement :-on or after 1st April 2009 except for pipeline from 1.4.2007 5. Formation:-Specified business must be newly commenced and not formed by splitting or reconstruction 6. Use of old machinery subject 20% of plant value. 7. Imported Machine :-not used in India earlier or any deduction has already claimed on it. 8. Audit of books of accounts 9. Deduction Amount: -100 % of expenditure 10.No deduction of these expenditure under any other provision. 11.Transfer/Destroyed/Demolished of capital asset: Deemed income under business head. 12.Loss of specified business is allowed to set off against income of specified business only. 13.

Q.26 State the deduction in case of Donation to certain association carrying out rural development Programmed?
Sec-35CCA:-Payment to Association & Institution for carrying out rural development programmes 1. The deduction is available to all assessee carrying on business or profession. 2. Any payment to approved association/institution carrying out rural development programmes or which imparts training to person to equip them to implement rural development programmes or to rural development fund set up by central govt. shall be entitled for deduction. 3. The deduction shall also be allowed regarding payment to National Urban Poverty Eradication Fund set up & notified by central govt.

Q.27 What are preliminary expense? How they are amortize?

Sec-35D:- Amortization of Preliminary Expenses Expenditure eligible for amortization:

1. Legal charges for drafting memorandum & Articles of Association. 2. Expenditure on printing of memorandum and Article of Association. 3. Registration fees of company. 4. Expenditure in connection with- Preparation of feasibility/project report - Conducting survey - Engg. Services for business 5. Legal charges of drafting any agreement relating to setting up business. 6. Expense in connection with public issue to share & debenture underwriting Commission, brokerage, drafting & printing of prospectus. w.e.f. A.Y.2009-10 :Amortization of preliminary exp. Is extended to service sector.

Deduction is allowed to an Indian co. or resident non-corporate assessee incurring an expenditure. 1. before the commencement of his business. 2. after commencement of his business, in connection with the extension of an industrial undertaking or setting up a new industrial undertaking. Limit of Aggregate Expense: 5% of cost of project Or 5 % of capital employed. [An option to Indian company only] Cost of Project = Cost of Fixed Asset as on last day of P.Y. in which business Commenced. Capital Employed = Share capital + Debenture + Long term borrowings.

Q.28 State the provision in case of expenditure of amalgamation & demerger? Sec-35DD:- Expenditure in case of Amalgamation & demerger
It is provided that where an assessee, being an Indian company, incurs expenditure on or after 1/4/1999, wholly and exclusively for the purpose of amalgamation or demerger. The assessee shall be allowed, a deduction equal to 1/5 of such expenditure for 5 successive previous years beginning with the previous year in which amalgamation or demerger take place. No deduction shall be allowed in respect of the above expenditure under any other provisions of act.

Q.29 How is the expenditure on VRS deducted? Sec-35DDA:-Expenditure incurred on voluntary retirement scheme
1. It provide for amortization of expenditure incurred on payments to employees on their voluntary retirement under voluntary retirement scheme. The deduction shall be allowed over a period of 5 Yrs. 2. In case of amalgamation or demerger, the provisions of this section shall apply to the amalgamated or the resultant co. where the assessee is an Indian Co. 3. Where a firm or proprietary concern is succeeded by company, the deduction Shall continue to be available to Successor Company subject to fulfillment of Certain conditions laid down in sec. 47. 4. In the year of transfer, no deduction shall be allowed to the amalgamating Co, the demerged Co. or firm or the proprietary concern. 5. No deduction shall be allowed in respect of the above expenditure under any other provision of act.

6. Sub-section (1) is amended so as to allow the whole expenditure incurred by the assessee in making payment to the employee in connection with his voluntary retirement either in the year of retirement or in any subsequent year, each part payment being entitled to deduction in five equal annual installments beginning from the year in which such part payment is made to the employee.

Q.30 State the provision for expenditure on prospecting minerals? Sec-35E:-Expenditure on prospecting Etc. for development of certain minerals
1. Indian co. or president non corporate assessee, incurs expenditure wholly and exclusively on any operation relating to prospecting for minerals or other natural deposit specified in VII schedule is entitled for deduction by way of amortization of such expenditure. 2. This expenditure are allowed as deduction in equal installment over 10 years against the profit arising from the commercial exploitation of any mine or natural deposit.

Q.31 State the provision relating to following items:1. Insurance premium 2. Bonus & commission 3. Interest on borrowed capital 4. Contribution to gratuity fund 5. Contribution to welfare fund 6. Bad debts 7. Write off animals allowance 8. Family Planning expenditure 9. R.D.D 10. Transfer to Special Reserve Section
36(1)(i) 36(1)(ia) 36(1)(ib) 36(1)(ii) 36(1)(iii)

Deduction
Insurance Premium- respect of damage or destruction of stock or store used for business/professional purpose. Insurance Premium paid by Federal Milk Co-operative society in respect of policy on life of cattle owned by member of primary milk co-op soc. Insurance Premium on health of employees by cheque by assessee as an employer in respect of policy on health of employees under scheme framed by G.I.C & approved by central govt. Bonus & Commission to employees subject to Sec-43B. Interest on borrowed capital - The capital must be borrowed for the purpose of business or profession - If it is payable outside India subject to TDS & Sec-40(a) - The interest on partners capital is allowed subject to Sec-40(b) - Interest on capital borrowed to purchased or construct any plant then, interest till the period it is put to use is capitalised and after that it is allowed as regular deduction under this section Interest on borrowed capital from scheduled , nationalized bank & public financial institution is subject to Sec-43B Employers Contribution towards RPF or Approved Superannuation FundSubject to Sec-43B Employees Contribution towards Staff Welfare Schemes, provided that the payment is made before due date as stated in the respective act. Write off allowance for animals in respect of carcasses Bad Debts - Their must be debt accounted in business or profession - They are written off in the books as irrecoverable. - They must be in the P.Y. - They must not be of discontinued business. It does not include provision for bad debt.

36(1)(iv) 36(1)(va) 36(1)(vi) 36(1)(vii)

36(1)(viia) 36(1)(viii)

Provision for bad & doubtful debts relating to rural branches of commercial banks.-7.5% of GTI subject to 10 % of total advances Transfer to Special Reserve- Following allowed as deduction the amount transfer to Special Reserve - Financial Corporation engaged in providing Long Term finance for Industrial & agriculture development in India or for Development of Infrastructure facility. - Indian Public company with main objects of carrying the - Business of providing LT finance for construction or purchase of houses in India for residential purpose - Government Company. - National Housing Bank Limit of amount of reserve 20% of profit & gains of business before this deduction. No deduction if bal. in Reserve = 2 [Paid Share Capital + General Reserve] Family Planning Expenditure Any bonafide expenditure incurred by company for purpose of promoting planning amongst its employees is deductible. If such expenditure is of capital nature then 1/5 of it is allowable as deduction in P.Y. in which it was incurred & balance is deductible in equal installment in next 4 years. No depreciation is admissible in case of capital asset used. In case of inadequacy or absence of profit of business deduction on capital expenditure cannot be allowed fully or partly the deficiency so arising is to be carried forward for set off in same manner as of unabsorbed depreciation Provide that any expenditure (not being in the nature of capital expenditure) incurred by a organization established by any Act, for the objects and purposes authorised by the Act under shall be allowed as a deduction. From the A Y 2008-09 deduction shall be allowed only if such corporation or body corporate is notified by the Central government, having regard to the object & purpose of the corresponding Central , State or Provincial Act. Banking transaction tax paid during the year in which the taxable banking transaction entered. Deduction available to company issuing zero coupon bonds. The discount on issue is allowed as deduction on pro-rata basis, for the period from date of issue to date of issue to date of redemption or maturity of such bonds. w.e.f.1.4.09 Zero coupon bond can be issued by only schedule bank.

36(1)(ix)

36(1)(xii)

36(1)(xiii) 36(1)(xiiia)

Q.32 State the conditions for deduction u/s 37(1)

Sec-37(1) : General Deduction 1. The expenditure should not be covered U/s 30 to 36. 2. It should not be in the nature of capital expenditure. 3. It should not be personal expenditure of assessee. 4. It should have been during P.Y. 5. It should be wholly & exclusively for the purpose of business or profession carried on by assessee. 6. It should be in respect of business/profession carried on by assessee. Some Special Points Interest on borrowed money Interest on money borrowed for acquiring capital asset is deductible.

 Interest on money utilized by a newly started company, which is in the process of construction and erection of plant before the commencement of production can be capitalised and added to the cost of fixed asset.3 Interest on money borrowed for payment of income tax is not deductible. Interest paid to government on loan taken for the payment of purchase tax is deductible. Interest paid by bank on deposits partly utilised for investment in tax-free securities is also deductible even though the relevant investment did not yield any taxable income. Cultivation of sugarcane and manufacture of sugar constituted one single and indivisible business .The assessee was entitled to a deduction of interest ,which he paid on borrowings ,though they were utilised for the purpose of raising of sugarcane. Where a firm borrowed money and lent it to a partner for personal purposes, interest paid by the firm is not allowable as deduction. Guaranteed interest paid to shareholder on paid up capital is not deductible. Interest paid on Debentures is not allowable under this section but u/s 37(1) It is not for the income tax dept.to examine whether there was no need to borrow money because the assessee had ample funds on his own. Contribution in the interest of business is deductible. 1. Contribution to a trade syndicate with a view to prevent uneconomical competition. 2. Donation to Chief Minister drought relief fund for obtaining permits for export of gram. 3. Contribution to sugar cane growers to raise yield. Legal expenses for protection of business are deductible 1. Litigation expenses to protect trade or business. 2. Maintaining of an existing title to the business. 3. Alleged offence of infringement of patent right. 4. Protection of capital assets. 5. Criminal prosecution of directors on change of products below standard. 6. Alteration of Memorandum & Article of Association to bring in conformity with law.

Expenditure deductible as per CBDT circulars.

1. 2. 3. 4. 5. 6. 7. 8. Premium on loss of profit policy. Professional Tax. OYT deposit allowable in the year of payment. Annual listing fee on stock exchange. Interest payable on unpaid price of plant or machineries. Commitment charges. Amount paid under Tatkal Telephone Deposit Scheme. Deposit for telex communication.

Disallowances. Sec-40 to Sec-43

Q.33 What are the items specifically disallowed u/s 40(a)?

Salary paid outside India or in India to NRI on which tax is not deducted or deducted but not paid within due date. Interest paid outside India or in India to NRI(not company) on which tax is not deducted or deducted but not paid within due date. Royalty or fees for technical services paid outside India or in India to NRI on which tax is not deducted or deducted but not paid within due date. Income tax or wealth tax or tax of similar nature in foreign country. Any payment to provident or any other fund for benefit of employees Tax Paid by employer U/s 10(10CC)

 Securities transaction tax. Payment to Resident o Interest o Commission or brokerage o Professional fees and technical fees o Contractor or sub-contractor on which tax is not deducted or deducted but not paid within due date. w.e.f. A.Y. 2009-10 TDS on expense for month of March is deductible and deposited within due date of filing return, then allowed. TDS on expense till February should be deductible and deposited on or before 31st March of P.Y. ,then allowed.

Q.34 State the condition for remuneration & interest on capital to Partner?
Sec-40(b): - In respect of Partnership Remuneration paid to partners is deductible if the following conditions are satisfied: i. It should be paid only to working partners. ii. It must be authorized by partnership deed. iii. It should not pertain to period prior to partnership deed. iv. It should not exceed the permissible limit. v. Remuneration includes salary, bonus, commission etc. Q.35 Discuss the explanation to section 40(b)? Explanation 1.Where an individual is a partner in a firm on behalf, or for the benefit, of any other person (hereinafter referred to as partner in a representative capacity and person so represented, respectively), (i) interest paid by the firm to such individual otherwise than as partner in a representative capacity, shall not be taken into account for the purposes of this clause; (ii) interest paid by the firm to such individual as partner in a represent-ative capacity and interest paid by the firm to the person so represented shall be taken into account for the purposes of this clause. Explanation 2.Where an individual is a partner in a firm otherwise than as partner in a representative capacity, interest paid by the firm to such individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person. Explanation 3.For the purposes of this clause, book-profit means the net profit, as shown in the profit and loss account for the relevant previous year, computed in the manner laid down in Chapter IV-D(i.e. sec-28 to 40) as increased by the aggregate amount of the remuneration paid or payable to all the partners of the firm if such amount has been deducted while computing the net profit. Explanation 4.For the purposes of this clause, working partner means an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner;]

Q.36 What is the limit of remuneration to partners?

Sec-40(b) The limit is as under:W.e.f. AY 2011-12 In case of loss Rs.150000 (a) on the first Rs. 3,00,000 of the bookprofit or in case of a loss Rs.150,000 or at the rate of 90 per cent of the book-profit, whichever is more;

(b)

on the Balance book-profit

at the rate of 60 per cent;

Interest (on capital or loan or deposit) to any partner:- limited up to 12 %

Q.37 What is the provision for remuneration to members to AOP or BOI ?

Sec-40(ba): - Amount not deductible in case of A.O.P. & B.O.I. Applicable to : In the case of an association of persons or body of individuals [other than a company or a co-operative society or a society registered under the Societies Registration Act, 1860 (21 of 1860), or under any law corresponding to that Act in force in any part of India], Payment to Members:- Such as interest, salary, bonus, commission or remuneration, by whatever name called, made by such association or body to a member of such association or body.

Q.38 State the provision relating to payment made to relatives or person having substantial interest ?
Sec-40A(2): 1. Any payment by assessee made to relative or to a person having substantial interest for any goods supplied or service rendered. 2. They are disallowed to the extent, the expenditure consider excessive over reasonable amount or unreasonable in view of market value of the goods on services or facilities. Sec-2(41) Relative: - Term relative in relation to an individual means, husband, wife, brother, sister of that individual. Sec-2(32) Substantial Interest: - A person is deemed to have substantial interest in the business or profession, if a person is beneficial owner of so much equity share capital (in case of company) carrying 20% voting power or 20 % profit of a concern at any time during the previous year.

Q.39 What is the provision in case any payment is made in cash?

Sec-40A(3): Expenditure exceeding Rs. 20000/- paid otherwise than by cheque, D.D. etc. Any payment more than Rs. 20000/- made in cash, then 20 % of such expenditure will be disallowed. w.e.f. A.Y. 2009-10 Any payment exceeding Rs.20000 otherwise than crossed Cheque or DD to any person on a single day , then such expenditure is disallowed. AY 2011-12:- w.e.f 1.10.09 Cash Payment for goods carriers is allowed up to 35000 Special cases If an assessee makes payment of two different bills then this provision is not applicable even if the payment is less than 20000/- i.e. unless the amount of bill and the amount of payment in cash exceeds Rs. 20000/- the provision is not applicable. Where assessee made payment over Rs. 20000/- at a time, partly by cross cheque and cash, but the payment in cash alone at one time did not exceed Rs. 20000/- then the provision is not applicable. It is not applicable in case of capital expenditure.

Q.40 State the exceptional cases in which payment in cash above Rs.20000 is allowed?
Exceptions (Rule: 6DD):-

i. ii. iii. iv. v. vi. vii. viii. ix. x. xi.

Payment made to RBI, SBI, Co-op Bank, land mortgage bank, LICI, IFCI, ICICI, IDBI, UTI, etc. Any payment to Govt. Payment by letter of credit, telegraphic transfer, book adjustment, bill of exchange etc. Payment under contract before 1st Apr. 69. Payment for Agri-product, produce animal husbandry, fixed products, horti-culture or apicultural product. Payment for product manufactured without power in cottage industry. Payment in a village not served by bank. Payment by way of terminal benefits to a person drawing less than 7500/- in the year of retirement or preceding year. Payment of salary to a person if pasted to a place other than normal place for more than 15 days and bank account is not opened at that place. Payments made on holidays and strike of bank. Payment made to agent who has to make payments in cash on behalf of assessee.

Q.41 State the provision of gratuity and non-statutory fund?

Sec-40A(7): - Provision of Gratuity: It is not deductible, but the provision for contribution to approved gratuity fund becoming payable is allowed. Sec-40A(9): - Payment to non-statutory funds Sum is paid by way of contribution towards RPF or approved Super Annuation fund is deductible to the extent allowed by any law. But payment to non-statutory funds is not deductible.

Q.42 What are payments which are allowed on actual payment basis?
Sec-43B: - Deduction on Actual Payment are : Any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, Any sum payable by the assessee as an employer by way of or contribution to any provident fund or Superannuation fund or gratuity fund any other fund for the welfare of employees, Bonus & Commission as per sec-36(1)(ii). Any sum payable by the assessee as interest on any loan or borrowing from any public financial institution [or a State financial corporation or a State industrial investment corporation], in accordance with the terms and conditions of the agreement governing such loan or borrowing Any sum payable by the assessee as interest on any term loan from a scheduled bank in accordance with the terms and conditions of the agreement governing such loan or advances,

Any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee

Q.43 State the time limit for payment which are allowed on actual payment basis? Sec-43B
The payments are allowed if they are made on or before due date of filling return. Where such payment is made in cheque, it should be realized within 15 days. Such evidence of payment should furnished with the return of income.

Q.44 What is the provision relating to foreign exchange fluctuation ? Sec-43A:- Special Provision consequential changes in the exchange rate of currency

Where a capital asset has been acquired from a country outside India the addition or deduction from the actual cost of the asset on account of change in the rate of exchange in any previous year shall be allowed to be made only on actual payment by the assessee towards the cost of asset or repayment of the loan or interest, irrespective of the method of accounting adopted by the assessee. This section is in contradiction to Accounting Standard 11 of ICAI where the liability in foreign currency at the year end has to be increased or decreased based on the rates prevailing at the year end while corresponding increase or decrease has to be effected in the value of assets.

Q.45 State the provision relating to Deemed Profit? Sec-41: - Deemed Profit
Sec-41(1): - Recovery against any deduction Where any allowance on deduction of loss on expenditure during the previous year or preceding the previous any amount, received in respect of such expenditure or loss is chargeable to tax as business income. It is applicable even if remission or cessation of any liability because of unilateral act of assessee. This provision can invoke to sales tax, excise duty refund, received in relevant previous year. Even when the part of duty was not claimed as expenditure. Sec-41(2) Balancing Charge Applicable to Power generating unit Balancing charge means if whole of the block is sold and the WDV becomes (negative then the excess amount to the extent (Cost Accumulated depreciation) charge to tax as notional income U/S 41(2). Sec-41(3): - Sale of Asset used for Scientific Research Where any capital asset used in scientific research is sold without having being used for other purpose and the sale proceeds, together with the amount of deduction u/s-35 exceeds the amount of capital expenditure such surplus i.e. sale price or amount of deduction which ever is less is chargeable to tax. Sec-41(4): - Recovery of Bad Debts Where any bad debts has been allowed as deductions u/s-36, and Then subsequently recovered is greater than the debt and deductions so allowed, excess realization is chargeable to tax as business income Sec-41(4A): - Amount withdrawn from reserve created u/s-36(1)(viii) Sec-41(4): - Recovery after discontinuance of business or profession is deemed to be the income of recipient and charged to tax in the year of receipt. Sec-41(5): - Adjustment of Loss Generally, the loss can not be carry forward after 8 years. An exception is provided by this section it is applicable if i. Business or profession is discontinued. ii. Loss of such business or profession pertains to the year in which business is discontinued could not be set off against any other income of that year. iii. Such business is not a speculation business. iv. After discontinuation of business there is a receipt which is deemed as business income u/s-41 v. The unabsorbed loss pertains to the year in which business profession was discontinued is permitted to be set off against notional business income U/s-41 even after 8 years. Return of loss is not required to be submitted in time.

Q.46 Is the maintenance of accounts compulsory under income tax ? state the provision if any ?
Sec-44AA - Maintenance of Accounts The requirement of Sec-44AA and Rule 6F for compulsory maintenance of books may be summarized as underi. Person in specified profession, if their gross receipts exceeds Rs. 150000 in all the three years immediately preceding previous year should maintain the books of accounts as prescribed by Rule 6F. ii. Person in non-specified professions or any business, if their income from profession or business exceeds Rs.120000 or total turnover exceeds Rs. 10,00,000 in any of the three years immediately preceding the previous year must maintain books of accounts. Specified Profession: - Legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration or other notified profession. Specified books of accounts as given in Rule 6F Cash book, Journal, Ledger, Carbon copies of machine numbered bills exceeding Rs.25, Original bills. For medical practitioner: i. Daily case register in Form No.3C, showing date, patient name, nature of professional services render, fees received, date of receipt. ii. An inventory as on first and last date of previous year and stock of drugs and medicines and other consumable etc. Consequence of default : Penalty u/s 271A fixed Rs.25000

Q.47 What is provision of compulsory audit under income tax ?

Sec-44AB - Tax Audit It is a compulsory audit for the following persons, of their books of accounts by Chartered Accountant 1. Person carrying on business: - if turn over, sales, gross receipts, exceeds 40 lacs. 2. Person carrying on profession: - it the gross receipts exceeds 10 lacs. 3. From assessment year 1998-99, an assessee who claims that profit and gain from business are lower than the profit and gains computed in accordance with Sec-44AD or Sec-44AE or Sec-44AF. w.e.f.A.Y. 2009-10 Due date for getting the books audited 30th September of assessment year in case of corporate or non-corporate assessee. For kaccha arachtia (commission agent) turnover is only commission & does of includes sales on behalf of principles while in case of pacca arachtia total sales is to be considered.[Cir.452-dt.17-386] Report of audit of accounts to be furnished under section 44AB. Rule 6G (1) The report of audit of the accounts of a person required to be furnished under section 44AB shall, (a) in the case of a person who carries on business or profession and who is required by any other law to get his accounts audited, be in Form No. 3CA; (b) in the case of a person who carries on business or profession, but not being a person referred to in clause (a), be in Form No. 3CB. (2) The particulars which are required to be furnished under section 44AB shall be in Form No. 3CD Consequence of default :- Penalty U/s 271B % of turnover subject to Rs100000.

Q.48 What is taxation on Presumptive basis? State the provision in Case of following activities 1. Any Business

2. Hiring trucks
Presumptive basis : It means if the condition u/s 44AA and 44AB are not satisfied then the assessee engaged in particular activity can be taxed with certain % of gross receipts without writing books and getting them audited. w.e.f AY 2011-12 Sec.44AD: -Computation of profits and gains of business New section substituted all eligible assessee engaged in eligible business to pay tax on the income, computed at 8% or more of the turnover of such business. LLP and companies not covered within the meaning of eligible assessee. Business of transporter and other business having turnover of more than 40 lacs are not covered within the meaning of eligible business. Features of the scheme The scheme is applicable to all assessee whose gross receipts from the above mentioned business does not exceed Rs. 40 lakhs. The income from the above mentioned business will be estimated at 8%of the gross receipts paid or payable to an assessee . A taxpayer can however voluntarily declare a higher income in his return. All deductions under sec. 30 to 38, including depreciation, will be deemed to have been already allowed, and the written down value will be calculated accordingly. The deduction under sec. 40[b] shall be admissible in computing the income of PFAS presumptively. The assessee will neither be required to maintain books of accounts under Provisions of sec.44AA, nor required to get his accounts audited under the Provisions of sec. 44AB in respect of his income from the business of civil Construction. However, such an assessee is required to comply with the Requirements of both sec.44AA and 44AB in respect of his business, which are not covered by this scheme. Accordingly, all deductions under sections 80C to 80 U will be available to the assessee, if conditions therein are fulfilled. The scheme is optional. A system of rebuttal has been provided. A person can claim that his income in respect of the above mentioned business is lower than the specified estimate of income .In such case ,the tax payer will have to maintain books of accounts under sec.44 AA and gate his accounts audited and furnish an audit report u/s 44AB .

Sec-44AE:- Computation of profit and gain of business of plying ,hiring trucks or leasing goods carriages .
1. This scheme applies to a person owning not more than 10 goods carriages. 2. This scheme applies where turnover /gross receipts are less than 40lakhs. 3. In case of heavy goods vehicle, the income estimated at Rs.5000 for every month or part of month during which goods carriage is owned by assessee. In case of other than heavy vehicle, the income estimated is Rs.4500 4. Deduction u/s 30 to 38 will be deemed to have already been allowed. 5. Deduction u/s 40 (b) shall be allowed in case of firm . 6. Neither required maintain books u/s 44AA nor required to get audited u/s 44AB. 7. Deduction under Chapt.-VI-A will be available to such person . Section-wise summary Section Particulars 28 Chargeability

30 Rent, rates ,taxes & insurance for building 31 Rent, repairs & insurance of machinery, plant, furniture 32 Depreciation 33AB Tea/Coffee development 33ABA Site restoration fund 33AC Reserve for shipping business 35 Expenditure on scientific research 35(2AA) Weighted deduction for contribution to scientific research institute. 35(2AB) In-house research expenditure 35ABB Amortisation of telecom license 35AC Expenditure on eligible projects 35CCA Donation to scientific & rural development programme 35D Preliminary exp. 35DD Amortisation of amalgamation/demerger expense 35DDA Amortisation of VRS expense 36 Insurance, Contribution, bad debts, interest, bonus, commission etc. 37(1) General deduction 37(2B) Advertisement 40(a) Specific disallowance 40(b) Remuneration & interest to partner in firm 40(ba) Remuneration & interest to member of AOP 40A(2) Payment to relative 40A(3) Cash Payment exceeding Rs.20000 40A(7) Provision of gratuity 40A(9) Contribution non-statutory funds 41 Deemed Profit 43(1) Actual Cost 43A Special Provision in case of changes in exchange rates 44AA Maintenance of books of a/c 44AB Tax Audit 44AD Taxation in case of business of civil construction 44AE Taxation in case of business of plying & hiring vehicles 44AF Taxation in case of business of retail trading Supporting Sections Section 2(11) 70 & 71 72,72A & 73 145 145A 271AA 271B Particulars Block of asset Method of Accounting Method of Valuation of stock. Penalty for failure to maintain books of accounts Penalty for failure to get accounts audited

Q.50 Discuss the provision of set off of loss and carry forward?

CHAPTER 8 CAPITAL GAIN

Q.1 What is Capital Gain? State its chargeability?
Capital Gain means any profit on sale of capital asset.

Basis of charge (Sec-45) - Their should be Capital Asset - Capital asset transferred in P.Y. by assessee - Gain is not exempted U/s 54

Q.2 Define capital asset? State types of capital asset? Capital Asset [Sec-2(14)]
It includes all immovable & movable property excluding Stock-in-trade, consumable or raw material held for business purpose Personal effects of assessee i.e. movable property including wearing apparel & furniture held for personal use of any member of family dependent upon him. Exception: Jewellery, archaeological collection, drawings, paintings, sculptures or any work are is taxable Agricultural land in India

provided not in area within territorial jurisdiction of municipality or cantonment board having population of 10000 or more and in any notified area 6% Gold bond 77, 7% Gold bonds, National Defense Bond 80, issued by GOI. Special bearer bond 91 Gold deposit bond Under Scheme 99 The types are on basis of period of holding the asset. They are long term and short term. Determination of Long-Term & Short-Term Asset held for more than 36 month from the date of acquisition to date of transfer is Long- term asset. Exception:- following will be LT if held for more then 12month 1. Equity shares 2. Securities Debenture Listed in recognized stock exchange 3. Units of UTI 4. Units if Mutual Funds specified U/s 10(23D) 5. Zero coupon bond Asset which are held for less then 36 month (for some asset 12 month) are called as short term capital asset.

Q.3 Define Transfer? When the transfer is effective? Transfer [Sec 2(47)]
Transfer in relation to capital asset includes; - Sale, exchange or relinquishment of capital asset or - Extinguishments of any rights or - Compulsory acquisition under any law - Conversion of capital asset in to stock in trade - Transaction involving the allowing the possession of any immovable property to be taken or retained in part performance of contract - Any transaction, which has effect of transferring, or enabling the enjoyment of any immovable property. - Maturity or redemption of zero coupon bonds

Transfer when effective & complete

Immovable Property:-When document register till title is not pass or registered i.e till deed is not executed. Movable Property :- When document not register-if following condition satisfy ownership is transferred;(1)written contract (2)transferee paid consideration or is willing to perform his part of contract(3)transferee has taken possession

Q.4 State the transaction not regarded as Transfer?

Section 46(1) 47(i) 47(iii) 47(iv) 47(v) 47(vi) 47(via) Transaction Distribution of asset on liquidation of company. Distribution of asset on partition of HUF. Transfer under gift or will or irrevocable trust. Transfer by Holding co. to 100% Subsidiary(Indian) co. Transfer by 100% Subsidiary(Indian) co. to Holding co. Transfer of asset by amalgamating co. to amalgamated (Indian)co. Transfer of shares held in Indian co. by amalgamating co. in case of Foreign amalgamation, provided 25% shareholders remain same & Sec-49(1) applicable Yes Yes Yes Yes Yes Yes No

no capital gain tax in foreign country. 47(vib) 47(vic) Transfer of asset by demerger co. to resulting Transfer of shares held in Indian co. by demerger co. in case of Foreign demerger , provided 75% shareholders remain same & no capital gain tax in foreign country. Transfer or issue of share by resulting co. in case of demerger. Transfer of shares held in amalgamating co. to amalgamated (Indian co.) for consideration of shares in amalgamated co. Transfer by GDRs by NRI to another NRI Transfer of any art work, archeological, art collection, manuscript, drawing , photos, paint to government/university/ national museum/ national art gallery. Transfer by way of conversion of bonds/debenture /deposit certificate in to shares of the same company Conversion of Firm into company and AOP/BOI to corporatisation Conditions required are:1. All Asset/ liabilities are transfer 2. All partners become shareholders of company 3. Partner received consideration only in form of shares of company. 4. All partner held at least 50% share in the company for next 5 years from date of conversion. 5. Corporatisation/demutualization carried out as per SEBI rules. Transfer of membership rights of RSE to acquire shares in accordance with scheme Conversion of proprietary concern in to company. Conditions:1. All Asset/ liabilities are transfer 2. All partners become shareholders of company 3. Partner received consideration only in form of shares of company. All partner held at least 50% share in the company for next 5 years from date of conversion. w.e.f A.Y. 2009-10 Transfer of capital asset in case of reverse mortgage in notified scheme is not transfer. No Yes No

47(vid) 47(vii) 47(viia) 47(ix)

No

47(x) 47(xii)

No No

47(xiiia) 47(xiv)

No No

47(xvi)

Q.5 Computation of Capital Gain [Sec-48] Particulars Full Value of Consideration Less: Incidental exp. Less: Cost of Acquisition / Indexed Cost of Acquisition Less: Cost of Improvement / Indexed Cost of Improvement Long Term /Short Term Capital Gain Amount XXXX XXX XXXX XXXX XXX

Q.6 Short note on Indexation

Indexation: It means to give effect of inflation to the cost of LTCA to make the cost equivalent with todays cost . It is applicable only of LTCA. It is not allowed in certain cases:1. Transfer of bonds other then capital indexed bonds 2. Debenture 3. Transfer of units, GDRs, share or debenture acquired by NRI in Forex. 4. Transfer in case of Slump sale. 5. Depreciable assets The indexation start from the previous year in which the asset is first held. It is applicable to cost of acquisition It applies to cost of improvement which incurred after 1981.

Q.7 State the provisions relating to cost of acquisition?

Section 55(2)(a)(i) 55(2)(a)(ii) 55(2)(aa) 55(2)(ab) 55(2)(b)(i) 55(2)(b)(ii) 55(2)(b)(iii) 55(2)(b)(v) Particulars GW/TM/Brand Name/rights of business purchased from previous owner GW/TM/Brand Name/rights of business self generated Rights and Bonus share Equity allotted to shareholder on demutualization Any asset acquired before 1-4-81 Asset acquired as per S-49(1) before 1-4-81 Cost of Acquisition Amount of purchased (FMV on 1-4-81 not allowed) NIL (FMV on 1-4-81 not allowed) As discuss below * Cost of acquisition of his original membership of stock exchange FMV on 1-4-81 or actual whichever is high Cost of acquisition of previous owner or FMV on 1-4-81 FMV on date of distribution Cost of share ,stock.

Distribution of asset on liquidation to shareholder Share acquired on conversion or consolidation

Cost of Acquisition of Bonus Share [Sec-55(2)(aa)] Condition Cost of Acquisition If the original shares & bonus acquired before Original- Actual or FMV High 1/4/81 Bonus FMV as on 1/4/81 If original share acquired before 1/4/81 and Original Actual or FMV as on1/4/81-High bonus after 1/4/81 Bonus Nil If original & bonus after 1/4/81 Original Actual Bonus Nil

Cost of Acquisition of Right issue [Sec-55(2) (aa)]

Situation Original shares on which rights issued. Rights entitlement (Renounced by assessee in favor of ) Rights share acquired by exercising his rights Rights shares purchased by person in whose favor rights has been renounced Cost of acquisition Actual cost paid for acquiring shares. Nil Actual amount paid Price paid to renouncer of rights+ amount paid to co. for rights shares

Q.8 State the provision of cost of acquisition in case of previous owner?

Cost of Acquisition [Sec-49(1)]

Where the asset transferred by any of the following mode then the cost of Previous owner shall be considered as cost of acquisitions to assessee. - On total or partial partition of HUF - Under gift or will - By succession, inheritance - Distribution of asset on dissolution or firm or AOP or BOI - Distribution of asset on liquidation of company - Under transfer to revocable or irrevocable trust. - Transfer by holding to its wholly owned Indian subsidiary company - Transfer by Indian subsidiary company to its Holding - Conversion by member of self acquired property in to HUF after 31.12.69 - Transfer in scheme of amalgamation.

Q.9 State the provision of cost of acquisition in case of conversion of debenture in to share?
Cost of acquisition in case of shares acquired in conversion of debenture [Sec-49(2A)] It shall be deemed to be that part of the cost of debenture/stock in relation to which an asset is acquired. E.g. Mr. A purchased 10 PCDs of Rs.100 each of A ltd. He receives 4 shares of Rs.10 each per debenture i.e. he received 4 shares in lieu of part of debenture cost Rs.50/-. Therefore cost of 4 share is Rs.50.

Q.10 Short note on Cost of improvement?

Cost of Improvement [Sec-55(1)(b)] It includes all capital expenditure after 31/3/81 by assessee in making any addition to capital asset. It also include expenditure incurred to protect or complete the title to capital asset or to cure such title.

Q.11 Short note on Advance received.

Cost in case Money received in advance [Sec- 51] - Advance received & deducted from cost of acquisition - Advance and other money received are treated as same. Other Money covers deposit for guarantee etc. so other money treated as advance received & forfeited.

Q.12 State the provision of deemed transfer ?

Section 45(1A) 45(2) 45(3) 45(4) 45(5) 46A 46 Particulars Insurance claim received for damaged or destruction of capital asset Conversion of asset in to stock-in-trade Transfer of asset by partner to firm as Capital contribution. Distribution of asset between partners on dissolution of firm. Compulsory acquisition of asset Buy-back of share Distribution of asset on liquidation

These are discus in detail: Insurance claim received for damage or destruction of capital asset to be treated as capital gain [Sec-45(1A)] Condition: Compensation received on damage of capital asset.

 Damage is due to i. Flood, typhoon, hurricane, cyclone, earthquake, or other natural calamity. ii. Riot or civil disturbance iii. Fire explosion or accidental iv. action by an enemy or combating enemy Computation of Capital gain in case of Conversion of Capital asset in to Stock-in-trade [Sec-45(2)] 1. As per amendment in Sec-2(47) & 45 it was decided that when the capital asset is converted in to stock it will be deemed to be transfer u/s 2(47) and their will be capital u/s 45 when then stock is cleared. 2. FMV of Capital asset on date of conversion shall be deemed to be full value of consideration received or accrued. E.g. If Jeweler of Rs.50000 acquired on 1-4-00. It was converted in to stock on 1-4-05 when its FMV was Rs.80000. It was sold in P.Y. for Rs.100000. Then its taxability is as under; Full value of consideration Less: Cost of acquisition Long Term Capital Gain 80000 50000 30000 Sale Proceeds Less: Cost price Business Profit 100000 80000 20000

Computation of capital gain in case of transfer of Firms asset to its Partner & viceversa [Sec-45(3) & Sec45(4)] A) Transfer by Partner [Sec-45(3)] :By way of introducing capital or otherwise the capital gain is chargeable in the P.Y., in the hands of partner. 1. Amount recorded, as book value of the capital asset shall be taken as full value of Consideration received or receivable. 2. It is also applicable to members of AOP. B) Distribution of asset on dissolution of firm or otherwise. [Sec-45(4)] 3. In this case firm has to pay tax on capital gain on transfer of asset to partners, in the P.Y. 4. The Full value of consideration is the FMV as on date of transfer. If the asset is depreciable the there is Short term capital gain. Computation in case of Compulsory acquisition [Sec-45(5)] - Initial compensation taxed as and when received. - Additional /enhanced compensation received is taxed in the relevant P.Y.

Q.13 What is the full value of consideration in case of Land or building or both ?
Special provision for Full Value of Consideration [Sec-50C] This applies to land or building or both. As per the provision the value of stamp duty is deemed as Full Value of Consideration if the actual consideration is less. If assessee claims that value of stamp duty exceeds FMV as on date of transfer then AO may refer to Valuation officer. In such case if the value as per valuation report exceeds stamp duty then value as per stamp duty is considered as full value of consideration.

Q.14 When does the Assessing Officer can take reference of Valuation officer?
Reference to Valuation officer [Sec-55A] Condition: When the asset value claimed by the assessee is in accordance to estimate made by registered valuer, but AO is in opinion the value so claim is less than FMV. Where AO is of opinion that FMV of asset exceeds value of asset by more than Rs.25000 or 15% of value claimed by assessee whichever is less.[Rule111AA] Where AO is of opinion that having regard to nature of an asset and relevant Circumstances, it is necessary to do it.

Q.15 How is Capital gain determine in case of depreciable asset? what is the cost of acquisition in this case ? Capital gain in case of Depreciable Asset [Sec-50]
It is calculated in the following way: Full value of consideration Less: Incidental expense Less: Opening WDV of the Block Asset acquired during P.Y. Short Term Capital Gain XXXX XXX XXXX XXX

If the block is fully transferred 1. There is either short term capital gain or capital loss. If the block is partly transferred Then assessee either has short term capital gain or can claim depreciation on balance as the block doesnt ceases.

Q.16 How is the gain on sale of undertaking determine? Slump sale [Sec-50B]
Slump sale means transfer of one or more undertaking or divisions without valuing the asset & liabilities individually. Capital gain =Lumpsum consideration minus net worth. Net worth = Assets taken over minus liabilities. Assets taken over = WDV of depreciable assets plus Book value of other assets. Revaluation shall be ignored. Benefit of indexation is not available Report of Chartered Accountant in form no.3CEA is required to be furnished.

Q.17 Explain the exemptions from capital gain? Sec-54:- Transfer of Residential House Property
Eligible to Claim Asset Transferred Specific Individual & HUF Long term- Residential house property

Asset to be purchased Duration Amount of exemption Exemption Revoke -? Capital Gain Deposit Scheme applicability

Residential house property Within 1yrs back or next 2 yrs or 3 yrs construction from date of transfer Investment or Capital Gain whichever is less If new asset purchased transferred within 3 yrs from date of purchased Yes

Sec-54B:- Transfer of Agriculture Land

Eligible to Claim Asset Transferred Specific Asset to be purchased Duration Amount of exemption Exemption Revoke Capital Gain Deposit Scheme applicability Individual Short/Long term- Agricultural land if used by individual or his parents during last 2 years Agriculture land Within 2 yrs from date of transfer Investment or Capital Gain whichever is less If new asset purchased transferred within 3 yrs from date of purchased Yes

Sec-54 EC: - Transfer of any LTCA

Eligible to Claim Asset Transferred Specific Asset to be purchased Duration Amount of exemption Exemption Revoke -? Capital Gain Deposit Scheme applicability Any Assessee Long term capital asset Bonds of National Highway Authority of India or Rural Electrification Corporation ltd. or redeemed after 3 years. Purchased within 6 month from date of transfer Investment or Capital Gain whichever is less If new asset purchased transferred within 3 yrs from date of purchased, or converted in to money by loan or advance etc. No

Sec-54D:-Compulsory Acquisition o Land or Building a part of Industrial undertaking

Eligible to Claim Asset Transferred Specific Any Assessee Short/Long term capital asset being Land or Building forming part of an industrial undertaking, which is compulsory, acquired by government, used for 2 years for industrial purpose. Land or Building for industrial purpose within 3 years from date of transfer.

Asset to be purchased Duration

Amount of exemption Exemption Revoke -? Capital Gain Deposit Scheme applicability

Investment or Capital Gain whichever is less If new asset purchased transferred within 3 yrs from date of purchased Yes

Sec-54F:- Transfer of any LTCA except Residential HP

Eligible to Claim Asset Transferred Specific Any Assessee Any Long Term capital asset except residential house. Assessee should not own more than one house (other than new purchased) Residential house property Within 1yrs back or next 2 yrs or 3 yrs construction from date of transfer Capital Gain *(Cost of Investment / Net Consideration) If new asset purchased transferred within 3 yrs from date of purchased Yes

Asset to be purchased Duration Amount of exemption Exemption Revoke -? Capital Gain Deposit Scheme applicability

Sec-54G: - Transfer of industrial undertaking from urban to rural area-only Land, Building, Plant & Machinery
Eligible to Claim Asset Transferred Specific Any Assessee Shifting of industrial undertaking from urban to rural area includes Land or Building or rights in land & Building , Plant & Machinery. Land or Building or rights in land & Building , Plant & Machinery Within 1 year back or 3 years forward from date of transfer. Investment or Capital Gain whichever is less If new asset purchased transferred within 3 yrs from date of purchased Yes

Asset to be purchased Duration Amount of exemption Exemption Revoke -? Capital Gain Deposit Scheme applicability

Q.18 Short note on Capital Gain Deposit scheme. Capital Gain Deposit Scheme
U/s 54, 54B, 54D, 54F, 54G the capital gain is exempt if such amount is re-invested in new asset. If such reinvestment is not made before the date of furnishing return of income then it can be deposited in the scheme. Deposited before due date of filing return or date of furnishing return whichever is earlier. Deposited in a/c maintained by bank or institution approved for the scheme. Return shall be accompanied with the proof. If the amount is withdrawn and not utilized for acquiring new asset as per the provision then shall be treated as capital gain of P.Y. It is taxed in hands of legal heirs also in case of deceased assessee. If the amount deposited in the Capital Gain deposit Account scheme is unutilized for the specified period in the particular provision , then it is taxable as capital gain.

Q.19 Discuss the provision of Section 112? Sec-112

Tax on Long Term Capital gain @ 20% + S.C. Where the total income of any person is less than exemption slab, and if the person is having LTCG then the difference between exemption slab and total income is deducted from LTCG and then tax on it is calculated. E.g. Suppose TI = 25000, LTCG = 70000. Then Taxable LTCG =LTCG [Exempted Slab Total Income] i.e. =70000 [50000-25000] =70000-25000 = 45000. LTCG in respect of Shares & Securities The assessee has two options in case of LTCG on Shares & Securities.

Q.20 Taxation of STCG on securities. Sec-111A Conditions There is a short-term capital gain on transfer of equity share in a company or a unit of oriented fund. such transaction is entered on or after the date on which chapter VII of the finance [no 2]bill 2004 comes in to force, tax payable on such short term capital gains. It shall be computed at the rate of 15%. Deductions under chapter VI-A is not available from such short term capital gains.

Q.21 Discuss the provision of set off and c/f of capital loss? Section-wise summary
Section 45 45(1) 45(1A) 45(2) 45(3) 45(4) 45(5) 46 46A 48 49(1) Particulars Capital gain Chargeability CG arising from Insurance claim CG on conversion of capital asset in to stock CG in case of capital contribution by Partner/member CG in case of distribution of asset on dissolution of firm CG on compulsory acquisition CG in case of liquidation CG in case of buy-back of share Computation of CG Cost of acquisition

49(2A) 50 50B 50C 51 54 54B 54D 54EC 54F 54G 55(1)(b) 55(2)(a) 55(2)(aa) 55(2)(b) 55A

Cost of acquisition in case of conversion of securities in share Computation of depreciable asset CG in case of slump sale FVC in case of land and building Advance received Exemption in case of Residential House property Exemption in case of Agriculture land Exemption in case of compulsorily acquired land & building Exemption in case of LTCG of any asset Exemption in case of Exemption in case of Residential House property Cost of improvement Cost of acquisition of goodwill etc. Cost of acquisition of bonus and right shares Cost of acquisition of asset acquired before 1st April 1981 Reference to Valuation officer

Supporting Sections Section 2(14) 2(29A) 2(29B) 2(47) 10(33) 10(36) 70 & 71 74 112 115F Particulars Capital Asset LTCA LTCG Transfer Exempted Capital gain from US 64 Exempted Capital gain from eligible equity Set off of capital loss C/f of capital loss Special provision of LTCG Exemption to NRI

CHAPTER 9 INCOME FROM OTHER SOURCES

Q.1 State the income chargeable under the head Income from other sources?
Sec-56(1) Basis of Charge: As per Sec- 56(1), the following income is chargeable to tax. o Dividend. o Winning from lotteries, crossword, puzzles, races, card-games or games of any sort. o Gambling, bating. o Any sum received by assessee from his employees as contraction to any staff welfare scheme. (if not charged u/s-28) o Interest on securities. (if not charged u/s-28) o Income from machinery, plant or furniture on hire, (if not charged u/s-28)

1. 2. 3. 4.

Income from letting of plant, machinery or furniture along with the building and the letting of building is inseparable from letting of plant, machinery and furniture. (if not charged u/s-28) o Any sum received under key-man insurance policy including bonus (if not charged u/s-15 or 28) Any sum of money received in excess of Rs.50000 Received by Individual or HUF from any person. Receipt is without consideration. Received after 1-9-2004 If the above conditions are satisfied then it is considered as income u/s 2(24) in the hands of recipient and charged u/s 56(2) (v). Exceptions: Any sum received for consideration. Receipt before 1-9-2004. Received from relative. Receipt as gift on marriage of individual. Receipt due to inheritance or will. Receipt due to death. Receipt due to local authority Amount Rs.50000. Relative: - Spouse, brother and/or sister of individual or spouse or either Parents. In case of Cash gift or movable property all transaction will be considered for calculating 50000. In case of immovable property single transaction will be considered. o W.e.f AY 2011-12 Gift of asset other than cash value exceeding Rs.50000/- would now be covered within the meaning of section 56(2) for including income from other sources. For determining value of the asset either fair value on the date of gift or the value assessed by stamp authorities. Besides the following incomes are also charged u/s-56 i. Income from sub-letting. ii. Interest on Bank deposits and loans. iii. Royalty (if not charged u/s-28) iv. Directors fees. v. Ground rent vi. Agricultural income outside India. vii. Directors commission as guarantor to banker. viii. Directors commission for under writing shares or new company. ix. Examination fees received by teachers from person other than employer. x. Rent of plot of land xi. Insurance commission (if not charged u/s-28) xii. Casual income. xiii. Salaries to M.P. (member of parliament) xiv. Interest on foreign securities. xv. Income from undisclosed sources xvi. Compensation received for use of business assets.

Q.2 Define Dividend?

Dividend u/s-2(22): The following payments or distinction by company to its shares holders are deemed as dividend. Distribution of dividend on realization of any asset[Clause (a)] Any distinction of debenture, debenture stock, deposit certificate and bonus to Preference shareholders. [Clause (b)]

Distribution on liquidation of company (closure) [Clause (c)] Distribution on reduction of capital. [Clause (d)] Any payment by way of loans or advanced by closely held company to a share Holder. [Clause (e)]

Accumulated Profit Any payment or distinction of the aforesaid nature is dividend, only to the extent of accumulated profit of the company. It includes current year profit. Accumulated profit include i. All profits of company up to the date of distinction or payment or liquidation. ii. Accumulated profits are computed on basis of commercial profit and not on assessed income. iii. While calculating accumulated profit an allowance for depreciation u/s -32 is made. iv. Balancing charge assessable u/s-41(2) does not form accumulated profit. v. It includes tax free income. vi. Capital receipts are included in accumulated profit only if charged u/s-45 in the hands of recipient company. vii. Accumulated profit includes gross receipts, development rebate reserve, de4velopment allowances reserve and investment allowance reserve.

Q.3 Explain deemed dividend u/s 2(22)(e) ? Sec-2(22)(e)- Distinction by way of loans or advances: Any Payments after 31st May, 87 by way of loan and advance to the extent of accumulated profit by closely held company is treated as dividend in the following cases. o It given to share holders holding is 10% or more in equity. It is charged to tax as dividend in hands of shareholders. If it is given to a concern (HUF, Firm, company, AOP, BOI) in which a share holder holding at least 10% equity of Payer Company has a substantial interest, then it is treated as deemed to be dividend. However, the following payments are not treated as dividend; o Any advance or loan made to share holders in ordinary causes of business where money lending is a substantial part of business. o Any dividend paid by company and set off against any loan, which has already treated as dividend would not be assessed as dividend. Dividend Does not include: i. Any payment made in accordance with provision of Sec-77A of companies Act 1956. ii. Any distinction of share in accordance with scheme of de-merger. o

Q.4 Define Interim dividend?

Sec-8 Basis of Charge: Interim Dividend: - It is deemed to be the income of previous year in which the amount of such dividend is unconditionally made available by the company.

Q.5 Explain the taxability of winnings, interest & hiring of machinery or furniture?
Sec-56(2)(ib) Winnings from Lotteries, Cross-word, Puzzles etc. Any winnings from lotteries etc. are charged to tax under income from other source. It is to be gross up in case tax is deducted.

Tax incidence on winnings u/s-115BB. Flat rate of 30% + surcharge.

Sec-56(2)(id) Interest on Securities Income by way of interest on securities is charged to tax. As per Sec-2(28B), interest on securities means, Central Govt. or State Govt. securities. Interest on debenture or other securities for money issued by or on behalf of local authority or company or corporation, established by central, state or provincial Act. It is to be gross up in case tax is deducted. Interest on certain securities is exempt u/s 10(15) and some securities interest is deductible under chapter VI-A. Sec-56(2)(ii) -Income from machinery, plant or furniture belonging to assessee and let out on hire, is taxable Income from composite letting of building, machinery, plant, furniture u/s-56(2)(iii) i. If there is a letting of any of the above assets and if they are furnished and the rent received is composite and inseparable then charge u/s-56(2)(iii) ii. It is separable, then the rent of the building is charged u/s-22 and balance u/s-56

Q.6 Discuss the permissible deduction u/s 57?

Sec-57- Deduction Permissible: Sec-57(i): - Commission or remuneration for realizing dividend or interest on securities. Sec-57-(ia): - Deduction in respect of employees contribution towards staff welfare scheme. Sec-57-(ii): - Repairs, depreciation in case of letting out of plant, machine, furniture, building. Sec-57(iia): - Standard deduction in case of family pension. Amount of deduction Rs. 15000 or 33 1/3 % of such income (whichever is less) Relief U/s 89 is also available. Sec-57(iii): - Any other expenditure for earning income. Conditions: o Expenditure must be laid out wholly and exclusively for purpose of earning income. o Expenditure must not be of capital nature. o It must not be of personal nature. o It must be expended in relevant previous year.

Q.7 Discuss the specific disallowance u/s 58 ?

Sec-58 - Specific Disallowances i. Any Personal Expenditure [Sec-58(1)(a)(i)] ii. Interest which is payable outside India on which tax is not deducted or deducted but not paid.[ Sec-58(1)(a)(ii)] iii. Salary payable outside India and if tax is not deducted or if deducted but not paid.[ Sec-58(1) (a)(iii)] iv. Wealth Tax: - Any sum paid on account of wealth tax.[ Sec-58(1)] v. Amount specified by Sec-40A [Sec-58(2)] vi. Expenditure in respect of royalty and technical fees received by foreign company. Sec-58(3) vii. Expenditure in respect of winning from lottery or games etc. Sec-58(4) Section-wise summary Section 56 (1) 56(2)(i) 56(2)(ib) 56(2)(ic) Particulars Chargeability Taxability of dividend Winnings from lottery, games etc. Contribution of employees towards welfare fund

56(2)(id) 56(2)(ii) 56(2)(iii) 57(i) 57(ia) 57(ii) 57(iia) 57(iii) 58

Interest on securities Income from letting out machinery, furniture, plant. Income from letting out composite machinery, furniture, plant & building Deduction in case of dividend & interest on securities Deduction in case of contribution of employees Deduction in case of letting out plant, furniture, machinery & building Deduction in case family pension received Other deduction Disallowance